Bill Farren-Price, head of consultancy Petroleum Policy Intelligence said in a report:

“Ministers are agreed that failure to reach an agreement in December would damage OPEC’s credibility and there is a universal desire to make progress. The debate can be expected to be more diplomatic in tone…[but] there are still areas of disagreement.”

The December meeting will be taking place on dangerously shifting sands–rapid changes in oil production in Libya; tremendous uncertainty over the state of the world economy; and escalating political tensions between Iran and the West.

OPEC is about to face an interesting development—and one that will likely benefit European motorists from now on.

When it meets in December, the Organization of Petroleum Exporting Countries will host the new Libya. The fledgling oil democracy is part of a growing species in what was once almost exclusively a despots’ club. Already, the North African nation is making a spectacular return to oil markets after virtually shutting down its production amid the uprising that ended the 42-year rule of Moammar Gadhafi.

For Europe, which at times feels like it sits atop a house of cards, Libya’s come-back offers a bit of relief amid markets gone bipolar. The shutdown of the country’s oil and gas had worst affected debt-laden Italy which can really make do without the burden of additional energy bills.

So it was good news last week when Genoa-based ERG SpA said Libya’s returning oil was cutting into the price of crude feeding into Mediterranean refineries.

No major change is expected when the Organization of Petroleum Exporting Countries meets next month. But mid next-year, the group may finally decide to upgrade its quotas system—the allocation that formally restricts production levels for all its members bar Iraq.

Back in 2008, the group decided to reduce its collective output ceiling by 4.2 million barrels a day as oil demand and prices collapsed amid an acute global recession.

The world has moved on ever since and the global economy grew by 3.6% this year, according to OPEC. Yet the Vienna-based organization has kept its austerity measures frozen in the ice age of the banking crisis.

In June, Saudi Arabia and other Gulf producers did try to extract the quota out of its formaldehyde bottle amid rising demand and missing Libyan barrels. The move was forcefully opposed by an Iran-led group due to economic uncertainty.

Today, Europe is still sneezing bad news and it may be too early to assess the robustness of Libya’s returning production. So the status quo is expected to be maintained when the group meets on Dec 14. To be sure, Gulf members did boost their output outside their allocations anyway. And the group’s 11-quota bound overall is now producing 2.4 million barrels a day over its ceiling.

But a formal readjustment to OPEC’s quota system would bring more upward mobility to production and therefore have a soothing effect on oil markets. It would also restore the group’s credibility, by showing it is able to act in concert following the collapse of the June meeting.

This week, the two rival powers of the oil market, OPEC and the IEA, will publish their new long-term forecasts.

Among all the data backing up their competing visions for the future, observers will be looking for the answer to a very important question: Why can’t the world produce more crude oil?

After years of historically high prices, oil production has barely budged above its level of just over 80 million barrels a day reached in 2004.

Meanwhile, a similar situation has turned the gas industry on its head. There has been a boom in natural gas production, driven by extensive new exploration programs and investment in new technology. The U.S., which was previously doomed to be a major gas importer, may soon be exporting the stuff.

The oil and gas industries are so closely related. Often, both fuels are produced simultaneously from the same reservoirs. So why has gas production risen by 19% since 2004, but oil production by just 1.9%?

The answer begins to emerge if you look at the historical relationship between prices and production for oil and gas. For most commodities, higher prices stimulate higher production, either through providing greater incentives for exploration or opening up higher cost resources that were previously unprofitable.

This has been the case for natural gas. But for oil, the correlation seems to have broken down in the 1970s. (See first page of interactive graphic.)

European refiners dependent on Libyan crude must have breathed a sigh of relief when the regime of Col. Moammar Gadhafi suddenly fell and the rebels who ousted him quickly set about restoring lost oil production. However, comments from the head of OPEC Monday indicate that the end of hostilities may not lead to the long hoped-for boost to world oil supply, because other members of the exporters’ group are likely to cut their own production as Libya’s rises. So the tight oil market that has persisted through the long spring and summer of Libya’s civil war will not necessarily abate as normality is restored. Certainly, it looks highly unlikely that the oil market will move back into the kind of supply surplus that could put a serious dent in price. OPEC Secretary General Abdalla Salem el-Badri, a Libyan, told a forum in Dubai that, “when Libya will come to production, [Gulf] OPEC members will reduce their production…no doubt about it.” [More over the jump]

Full pre-war output of around 1.5 million barrels a day could be reached within 12 to 18 months because, “Libya has some of the best experts in the oil industry,” OPEC said. “If the National Oil Company is able to bring them together to start production as soon as possible, that period may be even shorter.”

This contrasts sharply with the view of the International Energy Agency, which said Tuesday it expects the full restoration of Libyan oil production to take at least twice as long.

Why? Because the IEA is doubtful that many of Libya’s oil facilities are safe enough for those oil experts to get to work.

The twin engines of the oil market—the U.S. and China—appear to be stalling at the same time.

A welter of recent oil demand data has shown that oil demand in both countries is coming in below expectations.

China’s consumption is growing more slowly and U.S. demand is shrinking.

Bearing in mind that the U.S. is the world’s largest user of oil and China the fastest growing consumer, this scenario indicates the recent drop of more than 10% in oil prices may only be the beginning.

While an even deeper drop in energy prices would certainly be a boon for the struggling European economy, the reasons for it hardly give cause for cheer.

Less than a month after releasing its emergency oil stocks for only the third time in its 37 year history, the International Energy Agency has given the oil market a passing grade.

Crude oil production is adequate, refiners are now getting enough light sweet crude oil, despite the loss of Libyan supplies, and the danger of a fuel supply crunch at the end of summer has faded, the IEA said Thursday.

“The oil market is looking a lot less tight,” than a month ago, said David Fyfe, head of the oil industry and markets division at the IEA. “I would characterize it as adequately supplied, assuming OPEC sustains production at higher levels.”

Anyone who witnessed the Organization of Petroleum Exporting Countries’ chaotic and acrimonious June meeting in Vienna might question the safety of this assumption. Two factions within OPEC—each led by political foes Saudi Arabia and Iran—apparently remain at loggerheads over whether the group pump more oil.

Data from the International Energy Agency published Wednesday amply demonstrates the key problem with world oil supply today—we are running faster and faster just to stand still.

In June, Saudi Arabia responded to rising oil demand, against the protests of fellow OPEC members, by pumping an extra 700,000 barrels a day of oil, according to IEA data. This is no mean feat—equivalent to more than half U.K. oil output—and takes Saudi oil production to its highest level in almost five-and-a-half years.

So what effect did this major effort have on the crucial balance between oil supply and demand? Very little.

When the time comes to cast their ballot in November 2012, one may predict U.S. motorists hitting Route 66 this summer will be grateful to President Barack Obama. But will they?

By giving the nod to half of a global release of oil from emergency stockpiles decided by oil-consuming nations worldwide, Mr. Obama spoon-fed instant pain relief into the mouth of every driver north of the Rio Grande. The move knocked $5 a barrel off crude prices as drivers were preparing to take the road for the 4th of July weekend.

But once the full effect of the magic pill sets in, watch out for the upset stomach.

Interfering in markets might end up pushing prices up in the long run and doesn’t resolve issue number one: America’s addiction to oil runs deep into both Wall Street and Main Street.

Though statistics do show an uptick in crude-oil demand in the second half of the year, the release is adding confusion at a seriously messed-up moment for the global refining industry.

The drop in crude prices is depressing margins at refineries with some markets already swamped with products. Indeed, despite claims the release is to make up for lost Libyan barrels, the U.S. only depended on Mr. Gadhafi’s country for 0.5% of its crude imports.

On paper, glut is good for consumers—it makes prices cheaper. But with the International Energy Agency, which oversaw the move, warning it may repeat it, refiners and oil producers will have little visibility on future supply. And, next time, they may let prices slip without further ado. For instance, if much of the U.S. crude is snatched by traders, it could go straight to build up commercial inventories.

That may trigger more worries for Gulf members of the Organization of Petroleum Exporting Countries.